Jul 28, 201101:33 PMBlog

Targeted tax rebate more effective than payroll tax cut

Jul 28, 2011 - 01:33 PM
A targeted, partially refundable tax rebate would be more effective than the current payroll tax cut that President Barack Obama has endorsed extending, according to an Economic Policy Institute/The Century Foundation Issue Brief.
In "A bigger and better economic boost," federal budget policy analyst Andrew Fieldhouse says that a modified version of the lump-sum tax rebates that were part of the 2008 Economic Stimulus Act would cost the government roughly the same amount as the payroll tax cut but would generate more economic activity while doing more to alleviate poverty and help working families. Enacted in December, the payroll tax cut reduced employees' share of Social Security payroll taxes from 6.2 percent to 4.2 percent. The payroll tax cut replaced the Making Work Pay tax credit that had been implemented as part of the 2009 Recovery Act.

Because the payroll tax cut was not targeted to low- and middle-income workers - the workers most likely to spend it - it was not as effective in generating economic activity as a lump-sum tax rebate would have been. Multipliers developed by Moody's Analytics chief economist Mark Zandi suggest a refundable lump-sum tax rebate would result in roughly 12 percent more jobs created per dollar than the payroll tax cut.

Furthermore, the payroll tax cut actually increased taxes for all individuals making less than $20,000 annually. Tens of millions of the lowest-income workers had more disposable income under Making Work Pay than they did under the payroll tax cut.

Finally, the payroll tax cut exposed Social Security to greater political risk by reducing payroll tax receipts and making the program partially dependent on general revenue. Social Security is designed to have a dedicated funding source; a lump-sum tax rebate would leave this funding source intact.

This issue brief and other information on budget issues can be found at EPI's website and at Century's website.


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